The financial markets have been ailing for more than a year but the economic troubles are only just beginning, as today’s batch of sobering updates reminds.
Perhaps the most damning evidence is the news that personal consumption expenditures (PCE) dropped by 1% last month: the biggest monthly fall since September 2001. The difference now is that the economic context is fundamentally and deeply negative whereas the tragic events of 9/11 were temporary and largely unrelated to the otherwise recovering trend. No such luck this time. We had an emerging economic tailwind when terror struck in 2001; today, there’s only a headwind—a strong headwind and one that’s likely to blow harder in the months ahead.

Nor can the sharp pullback in spending be blamed on income, which rose 0.3% last month, up from September’s meager 0.1% gain. The chart above suggests that consumers are now committed to saving more and spending less. In one respect, that’s encouraging. The savings rate in the U.S. has been falling for years, largely because consumption has taken wing. Those trends are now reversing, as they eventually would. In the short term, however, the implications are clearly negative for the economy, which is highly dependent on consumer spending to the tune of about 70%. As such, the sharp pullback in consumer spending hints that Q4 GDP will be materially worse than the Q3 pullback of -0.5%.

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